Episode 26: Matthew Stevens of Stevens.VC on
Helping Early Stage Companies to Professionalize and Add Value

Episode Transcript

 Shiv: Alright Matt, welcome to the show, how's it going?

Matt: Great.

Shiv: Excited to have you on. So why don't we start with an intro about yourself and your firm, and we'll take it from there.

Matt: Yeah, love to. Matt Stevens, I'm an operator turned investor after my last exit back in 2021. And I invest through family office, Stevens.VC, which is largely angel investing focused on supply chain, safety and security and e-commerce. And then I'm also an EIR with TechSquare Ventures, a seed and early stage venture firm focused on deals in the super south. So that's from DC to Florida and across to Texas.

Shiv: And in terms of the types of companies you're investing in, is there a particular stage that you focus on? I know you mentioned the industries, but just trying to understand the size of companies.

Matt: Yeah, largely seed and early stage and occasionally up through series A.

Shiv: Got it. And how do you find these investments or how do you vet them at the very least? Like, where do you decide where you're deploying your capital? Because through your family office, it's very much the decision making is entirely on you, right? So how are you figuring out where to deploy your capital and also, more importantly, your time?

Matt: Yeah, that's a great question. Really a two-part question, right? First is how do you source deals? And that's a pretty simple answer. It's 30 years in the same technology marketplace here in Atlanta. So I've really built a reputation and built an ecosystem here where even as a small office, I can compete because I really see more deals and become a trusted resource to the startup community.

Shiv: Got it. Walk us through that a little bit more. Like when you say trusted resource, like how have you gone about establishing yourself as that?

Matt: Yeah, largely it's through volunteer work and through helping to coach and mentor founders, even at times that they weren't raising capital. So helping them think through a capitalization strategy or helping them with, you know, whether it's an existential issue with their business or just a challenge like, you know, building a go-to-market strategy or something that they're struggling with. So it's just being out in the market and being clear and well known for, you know, the domains that I like to play in or the verticals that I like to play in.

Shiv: Mm-hmm and in your experience with the types of companies that you've got an exposure to and coaching and mentoring a lot of these founders, what would you say are some of the most common areas where you think their companies need either more sophistication or more coaching or some of the more fundamental pieces are just not in place?

Matt: Just by virtue of the stage that I get involved in, it's typically - there's not been a tremendous amount of investment in what I call basic operations, general management things. So ensuring that their legal structure and their cap table and their operating documents and everything else, FP&A, right? How they report and compile financials, how they project. Yeah, typically there's not a lot of rigor around those at this stage. And then universally, it's go to market strategy as well. With either pre-investment or once they take any capital, the number one expectation is the ability to grow the business. So my particular passion is building high performing growth strategies and building out revenue teams. So a lot of focus on go to market and go to market strategies.

Shiv: That's great. So let's start with the first piece that you mentioned, which is the fundamental operating pieces that need to be put into place. So what are some of those specifics within legal, within FP&A and what are the recommendations or things that you're helping these folks put into place?

Matt: Yeah, so let's start with a base understanding that we can add value even at the very early stages. So this is things like a complete employment and HR package, right? So some of this is risk mitigation, but other parts of it are really gonna be expected in the next round. So to take a step back, I'm constantly thinking about what's going to be required in the next round by the capital partner that comes in to help continue to support growing the business. So I think about it in terms of complete employment package. Do we have the right non-disclosures and non-competes ready for key members of the team? Do we have - we got the right intellectual property assignments? Are all of our contractors - do they all have agreements that are really clear where intellectual property lies? And some of that changes state by state

And then, you know, there's things that you run into through the course of running a business, like, you know, what happens when you separate from somebody and you have to have the right termination agreements in place and buttoned up. So I'm trying to think of professionalizing the business and how will they want to see it, you know, when they’ve got to do their series A or got to do their series B, how is an investor gonna look at this business? So, you know, FP&A and reporting, I think you had asked about that as well.

You know, budgeting is a really interesting process because especially in the early stages, it's so sensitive on revenue production. It’s difficult to get correct, but important that we at least take a really good educated try at determining how we're gonna produce revenue and how we're gonna spend. So that looks like probably creating their first reporting packages and perhaps creating their first board decks and getting into a cadence on understanding what the real sensitivities are in the business and how to report those out. Could include the creation of KPIs. We go into this as founders, so often we think about the problem that we're solving and not how to measure the business or how successful we are. So you can look at it - whether it's a platform business or a hardware business or pure SaaS - you can look at that and say, you know, there's probably an underlying set of KPIs that really help determine all of the health and growth of the business. And how do we, you know, how do we net that out and determine what those are? And better, how do we measure them without turning measurement into a project of its own?

Shiv: Right. And I think the big part about the FP&A, especially in those early stages, is that you got to really manage your cash, right? If I think - one of the, or the number one reason why companies fail is that they run out of cash. And it's shocking how few - how many founders actually focus on that and have a pulse on cash in and cash out. And what's your burn rate and how much runway you actually have.

Matt: Yeah, there was - during COVID, there was a group of CEOs that an angel investor here in Atlanta, Charlie Paparelli, would bring together about every other week for a call. And we would lament what was going on in our business. You know, if you remember the rate of change of data was so quick in that time. And he would open and close every one of these sessions about an hour long Zoom call by saying, just remember cash comes in slow and it goes out fast.

And that's absolutely right. A couple of million dollar investment can seem like a lot when you're at a seed stage. But boy, if you've got high burn rates, that money runs out the door very quick.

Shiv: For sure. Yeah. And I think the more founders are on top of that and they have the right metrics in place and they, and they know where the dials are, they have better controls in place to be able to make that cash last longer. So I think that's great advice. On the legal side, you mentioned some things that just stand out to me that I think are worth highlighting is things like IP assignments and NDAs and contractor agreements. Those are just fundamental pieces that any investor would want to have in place before they write a check and deals do fall apart because those agreements aren't in place at times. So just talk a little bit more about that piece.

Matt: Yeah, I think we've all seen one of the deals that fell apart in the late stages because the right IP assignment wasn't in place and there may have been a conflict over it. Listen, this is blocking and tackling, and mature operators really get this. But when you're working on a problem and you're a first time founder, you may never have had experience in having to deal with any of these things. So really important to have a package. I think, you know, anybody who's done this two or three times probably either has an attorney that they use or they have a sludge pile of data that they can bring templates from one deal to another. And that's just, you know, that's part of my personal operator investing philosophy. You know, it was five or 10 years ago, PE firms would all talk about the creative value add that they brought to the table. And I think that's come downstream where, you know, at a venture capital or even at an angel level you have to be able to talk about the additional value you bring into a deal as well. So really important to have these things buttoned up before you try to go out and raise your next round. There's a virtuous cycle with it as well, Shiv. I think not only does all this incremental value build EV of the business, right, which yields the better result that everybody's looking for, but if you're a founder and you're, you know, it's clear that both you can take coaching and that you've got your business in good shape. You know, there's a pretty good chance you're gonna last longer in your company than you would, you know, if you just went out and it was clear, somebody wanted to make the investment, but they weren't as interested in you as an operator. So building all this maturity ultimately helps on a couple of fronts for the founder.

Shiv: For sure. And it's not just about planning for an exit, right? It's just even just professionalizing the business to operate more than just like an off-the-cuff operation.

Matt: Yeah, absolutely correct. You know, professionalizing the business by itself isn't a goal, but as an operator, you know, an operator at heart turned investor, I understand that you don't want to spend your day working on the tyranny of the urgent. And the less professional your business is, probably the more problems you're going to run into that you're having to solve off the cuff. That's just draining your time from focusing on what really matters, which is growing your business.

Shiv: Yeah, you get pushback on that from CEOs. Like I can tell you that there are times when legal and financial work feels so sucking to me, but I also do it because it's essential to building our business. And so do you get pushback on that from CEOs that are more interested in marketing and sales or product work just to build the actual business itself?

Matt: Yeah, I wouldn't classify it as pushback. You know, it's something that nobody wants to spend money on. But certainly when you run into your first existential problem caused by not having the right legal framework in place or the right FP&A process in place, that's when you realize you should have spent more time or money on it, but at that point it's too late. So I don't think folks push back. What they want is… you know, ultimately they want it to be an easier process. And that's where, you know, somebody who's a - I know private equity has got its own model with operating partners. And, you know, that model has proved very fruitful. And I think it's more about just taking that model and bringing it downstream to venture and angel investing. So, you know, and folks ultimately appreciate it when, you know, when this structure is in place. I think founders, it resonates with them because they can focus on sales and marketing and they're not dealing with the latest fire to pop up in their business.

Shiv: Right. And yeah, so talk about that connection there. Cause I think especially with FP&A where the better you forecast, the better you understand cash in cash out, what are the real drivers of the business, the better you can plan for predictable revenue growth. And I think earlier you had mentioned that sales and marketing and just go to market in general is one of the other opportunity areas. So talk about how those dots connect for you.

Matt: Yeah, and let's understand, you know, quite often, you know, in the earlier stages, there's not, there's not a CFO in these businesses, right? So, you know, founder, founder-CEO is also doing the FP&A work themselves. So not necessarily a core competency of theirs. I think that there's - you know, you can get too precise. I once had a CFO of mine. He was really proud that we were, you know, just a couple of bips off in an annual plan. And this was in a business that was growing about 500% year over year. We're really a hyper growth business. And I just thought to myself, we probably spent too much time working on sensitivity models if we, if we got that close to it. You know, maybe we could have spent more time selling or doing other things that were more meaningful than keeping score in the business. 

But yeah, you know, the process. You know, the process is important because - a couple of things that you can never do, right? Miss payroll. That's not just a footfall. You do that, you're going to lose a team. And you also have to have the capital, you know, when you're ready, when you find product market fit, when your ICP is clear, and you can build a connection to predictable revenue growth, you'd better have the war chest to be able to throw capital at marketing and at sales. That's the right time to press in and to step through that gap.

Shiv: Mm-hmm. And so how do founders do that? Like, especially in earlier stages, like, what are the things that you've seen that they should be focusing on to build a more sophisticated engine on the go to market side?

Matt: Yeah, well, it starts with finding product market fit. You know, that's really all that matters. Ultimately, once you find that, you can move on to your, you know, to your ICP and then value proposition. We just have to understand why people buy and what their buying cycles are. So getting really clear on that is important in the early innings. And, you know, again, in these very early stages, you might have a very crystal clear idea about the problem, but not necessarily clarity about why your core customers are buying, or even what their buying cycles are. Is there an account or cyclical nature to it? So, it’s important for us to work through - I think that there really is a process to working through that from product market fit to ICP, to core buying reasons, to the ROI, and then just the mechanics. Once you have that figured out as a founder, you know, your first 10 customers, typically you're going to sell those yourselves. And then every time you hire another level of sales leadership or sales management or, you know, end sales people, there's, you know - there has to be a process for them to come up to speed on everything that you knew because you've probably spent a lifetime in that industry or selling to those types of folks.

Shiv: Right. Yeah, totally. And what we see when we come into a lot of companies, not just early stage, but just any company, companies that many of them don't spend enough time and really segmenting out their customer base or their total addressable market into a more focused segment that they know that they can win in or is an exact fit for what they're selling. And so they often are too broad. And that leads to a lot of inefficiency in their go to market where maybe they’re wasting marketing and sales spend, maybe they're targeting the wrong customers or conversion rates are too low. And so there's just a lot of waste overall by not doing a lot of this work.

Matt: Right, focus, focus, focus, right? Especially in these early innings of a business, every idea sounds like a good idea and any revenue seems equal, but having the discipline to be able to press into the things that matter is really meaningful.

Shiv: And how are you helping founders figure this stuff out on like as a VC or as an investor, like when you come into these businesses. Obviously a lot of the work has to be done internally, but just curious on your side, how are you supporting those founders to get to that place?

Matt: Yeah, there's a learning curve, certainly, right? And part of it starts with making good investments in areas that I can be meaningfully helpful. So part of my personal thesis is don't invest in things that I don't know about. That was learned in a very expensive manner - invested into some real estate stuff and hotels. It was not my industry. And when the founding team was talking about things like ADRR, I didn't really get what those metrics meant.

So the first step is really eliminating things that I shouldn't be involved in because I cannot be accretive and I'm not gonna be helpful to the business. After that, so if I can press into things that I really actually know about, have a passion about, I've spent time in my career on, there still is a learning curve because each problem landscape and then frankly each team that you work with is a bit different. So the process of you know, not only building good working rapport and building trust with the founding team, it's equally important as it is a lengthy process. And there is no substitution for time together. So, you know, purposefully carve out substantial portions of my calendar when I'm, you know, onboarding a new investment to really learn about the business, to learn about - this should happen in diligence as well - to learn about what drives the CEO, what drives his leadership team, and what they're really trying to accomplish. So when you do the homework in diligence, it not only prevents you from surprise, but it's something that ultimately yields benefit, post investment as well.

Shiv: Mm hmm. In terms of the investments themselves, when you're making them, like talk about what you're looking for as characteristics. And there's obviously what you're looking at during diligence. And I want to get to that. But more just when you're analyzing a company or founder, what are some of the characteristics that you're looking for?

Matt: Yeah. Well, in a lot of cases, you're betting on the jockey and not the horse at these phases. So I want to see things like, do they come from the industry? Do they have experience in it? I saw a deal recently that was a big DOJ attorney who was trying to do AI, and it wasn't even AI for the legal profession you know, I mean, a very skilled and very competent person, highly educated, had accomplished great things in the legal work, but it was moving on to a completely disjointed industry. And that just doesn't make sense. So I'm a pretty simple guy. I want things to make sense at their face value and that was one that didn't. So, you know, there's an example of something that's sort of exclusionary, you know.

Shiv: Yeah, I think just to jump in on that one is there's this concept of like an earned secret and great founders have an earned secret about a market. And also just founder market fit is, in my opinion, almost more important than product market fit, because the founder that has alignment with a market will find product market fit eventually. But if you don't understand the market, it's really hard to find that product market fit.

Matt: I love that term. I hadn't heard it before, but you're absolutely right. So, you know, we don't always have the luxury of looking at, you know, unit economics that have been proven out over time. Sometimes we have to take an incomplete data universe, you know, data set and boil it down and, you know, gain a high degree of conviction off of, you know, a handful of customers, but ultimately the business model needs to make sense. And if there's not an analog in the market, so if this isn't your proverbial fast follower, you have to build conviction that, you know, this business, that people will buy this for this reason. There's no substitute for talking to customers, even prospects, and especially folks who have said no. So market research is really important.

And this is where building a network and having folks that you can reach out to across a set of disciplines that you've got a high degree of familiarity with is really important. So when I look at deals inside of one of my market segments, I can find somebody who knows something about that business and can educate me about it within one or two telephone calls. And that's really important. 

And then there's some other things that are really important to me personally as an investor, which is do I care about the problem that they're solving? My business was a school safety product. I have three kids. Al -l at the time of being a part of this business - all my kids were in grade school. That was a problem that I cared deeply about. I had an emotional and a passionate connection to it. And I think that came through not only in my ability to build the team, but, you know, ability later to capitalize the business. And I think the same thing is true. I want to see somebody, you know, that cares about the problem that they're solving. But I need to be able to connect with the problem that they're solving. If it's something that is - that just doesn't, you know, register with me or it's just too difficult for me to understand, it's probably not a great investment for me because I can't help you with it.

Shiv: On the - I want to come back on the market research piece that you mentioned. Like how much of that are you diligencing at the earlier stages, because it may not be that the company has complete product market fit, or may not be that they have great retention yet, but they could get there. So how are you trying to figure that out? Because you could easily invest in something that sounds good, but doesn't have great unit economics or churn metrics, for example.

Matt: Yeah, well, remembering that, you know, in early stages, businesses often make pivots. So not really that concerned with churn, especially if you can cohort the churn and explain, you know, why folks in that, you know, in that cohort churn. Is it - was it pre-pivot? Have you moved your understanding of the problem landscape or of your ICP enough that it just didn't make sense? And some of that churn is precipitated by the company early.

There's customers that it's a good time to separate with them at a contract renewal phase simply because they don't - they might cost more to serve or be a distraction to your long-term vision. The TAM itself though - while probably the SOM changes more than the TAM - you have to get a really good idea about how big is this, the problem that we're solving. Cause these are all hopefully venture scale businesses that are going to - they're not lifestyle businesses, I'm not interested in those - and you know, we want to grow and scale them to a certain rate So we have to be able to justify a pretty big TAM and it's likely as well, Shiv, that they're not solving the completeness of the TAM that they're addressing early on. You know the first problem that they're solving probably is a fraction of the overall, you know, the overall landscape eventually that they will be solving, so got to be comfortable as well. That's more about the leadership team and the vision that they have to build a big company than it is about necessarily how big do you measure the SOM.

Shiv: Mm hmm. When you're looking at things like that though, are you trying to vet competitors or the overall market landscape and trying to look at how much potential opportunity is there? Or are you starting with more of like the fundamentals of the business and looking at the founders? And how important are just the founders themselves? And you mentioned the jockey over the horse. So just trying to understand looking at the founding team and that piece versus the market dynamics and the fundamentals of the of the business.

Matt: Yeah, to measure - really to measure the business opportunity, I'm looking at the market sizing and not necessarily at the founders, right? I want to see that they've got big vision to accomplish great things in that market. But I'm going to top down and bottom up, you know, not, not just going to trust their TAM slide, but you know, I want to top-down and bottom-up the market sizing myself, so I may take some slices out of it by, you know, the amount of ARR that they're going to drive per client and build up that direction. If they get a sufficient amount of market share, how big could this business be? Remembering as well, you have to factor time into this. So can this be a three to five, maybe seven year run in order to accomplish what we want to accomplish with the business. It's more about the underlying business fundamentals, size of the market than it is about the founding team.

Shiv: Are there things that discourage you or issues beyond some of these more obvious things where maybe they're previous investors or they're just not enough equity to go around? I'm just trying to understand what would make a deal fall apart on your side or common mistakes that you see founders make?

Matt: Yeah, well, there's a few. And I think we've talked about one of them already, right? There could be some legal structure that just - or some failure to get intellectual property assignments that disqualifies it. Matters of integrity and morality, that's a big deal, right? Those are disqualifiers. So you still have to do your diligence, no matter the phase, on the team. And that's largely by reputation, by having a focus on a small number of segments and a small geography, helps you sort of bridge that gap. 

As well, there's things related to the capitalization, prior capitalization of the business that can be really problematic. I've seen where founders will put some money in themselves or they'll say, well, this was - I could have been making this much money had I stayed at Big Co, so I'm gonna treat that as debt on the business and I want that paid off first when I'm trying to raise capital. And that's just not gonna work. That's not gonna work for anybody, through the - the equity that you hold as a founder really comes in because it's sweat equity early on. And then you wanna see clean cap tables, that makes sense. And in your friends and family round in the real pre-pre-seed stuff, you're gonna see, you know, real estate professionals and doctors and lawyers and your, you know, your rich uncle. That's okay to be on the cap table. But when you see a company that's hung around for two or three years, they've had sort of a never-ending cycle of safes or convertible notes and there's a big debt structure. Perhaps they've given away too favorable terms to somebody who maybe they needed at the time but who just doesn't, you know, it doesn't make sense. It's no fun to try and clean that stuff up because, you know, if I do have to clean that up, I'm seen as the bad guy in the room and I don't need to start a relationship by being the bad guy in the room.

Shiv: Right, totally. Yeah, I think all of those are really foundational issues where like, it's really about like, is this a relationship you wanna maintain long-term with this person more so than about the business and the opportunity there?

Matt: Yeah, that's right. That's right. If we could boil this down without the human factor, we could simply go out to Wall Street, run some models and find the right investments. But that's not what this type of investing is. This is, you know, finding a portfolio of early stage companies where you really believe in the founding team, the problem they're trying to solve and as the market big enough.

Shiv: Right. So talk about your approach then. So like you're putting in money at a pretty early stage. So what is a good outcome or what is your objective when you're putting money into these businesses? Is it that they find a venture backer and then you're kind of slowly transitioning out or are you long for the ride for as long as it goes?

Matt: Yeah, I'd like to stay in for a while. You know, sometimes you're going to remove chips and take your table stakes home with you. But I'd love to get involved personally in the pre-seed rounds and carry it through the A. Typically, by the time big private equity comes in, the folks who get to roll forward are the management team that stays involved. But I do reserve capital personally.

And then some of the funds that I work with as well, they reserve capital to be involved through the A and sometimes the B rounds.

Shiv: Okay. Well, that's, that's awesome. I mean, I think all of that makes total sense and I can totally see how founders would need a partner like you at an early stage. So if there are founders listening, what is the best way they can learn more about you or potentially reach out for either information or other, other ways to work with you?

Matt: Yeah, well, thank you for that. You know, the best way to find me is go to stevens.vc and you can click a couple of buttons and find me that way. So stevens, S-T-E-V-E-N-S dot V-C.

Shiv: Awesome. And with that said, Matt, thanks for coming on the podcast and sharing your insights. I know a bunch of founders will get a ton of value from that. So I appreciate you doing this.

Matt: Thanks, Shiv.